Used-Car Buyers Could See Big Savings If They Time Purchases Right

The wholesale value of used vehicles has fallen steeply, says the Manheim Used Vehicle Value Index, and some expect retail prices to follow.

The coming months appear to be the best time to save on a used car—and also one of the most unfavorable times to sell one.

A severe contraction in demand, in part because of the coronavirus pandemic, has led to the drop in prices; if that contraction persists, lower prices will, too.

The sweeping shutdown of the economy caused by the COVID-19 pandemic has sent reverberations through the entire auto industry; crude oil prices briefly went negative earlier this week, new-vehicle sales have been upended, and now, the used-car market is going through its own demand shock.

The Manheim Used Vehicle Value Index—a key benchmark for used-car values—saw the price of wholesale used vehicles drop 11.8 percent in the first 15 days of April as compared to the month of March. To illustrate how extreme that change was, the previous record drop in prices month over month was 5.5 percent in November 2008, according to Manheim.

Currently, retail prices, or the prices that everyday consumers see, haven't fallen along with wholesale prices. A Manheim analysis shows retail prices are down less than 1 percent, which is unusual because wholesale and retail prices of used vehicles are typically correlated. The complete stoppage in retail used-vehicle sales has led to uncertainty as to what the vehicles are worth. "All of us have seen stronger new-vehicle sales [compared with] used over the last month which is totally opposite to the way the year started, and at this point, I don’t think any of us really know what . . . the right values are on used vehicles," Mike Maroone, a dealer and former executive of AutoNation, said on the Automotive Newspodcast last week.

Nonetheless, industry analysts see retail prices coming down in the coming months, which means shoppers in the market for used cars can find steep discounts. "If you need a car now, just try shopping right now," Ivan Drury, senior manager of insights at Edmunds, said. "Throw out some feelers, because if you get a dealer who is aware that in a month it's just going to get harder and harder to sell [and that] they're going to have to keep reducing prices, you might be able to take advantage of this sooner versus later."

When, where, and for how long buyers will be able to find discounts on used vehicles is up for debate. Drury added that for months to come, it's likely people will be able to get deals on used vehicles. Edmunds is forecasting that the value of used cars today will follow a similar path to those in 2008 during the recession, a year when three-year-old vehicles lost almost 10 percent of their value, double what they lost the year prior.

Dale Pollak, the executive vice president at Cox Automotive and the founder of vAuto, wrote in a letter to dealers: "Today's huge supply of wholesale inventory suggests supplies will be even larger in the months ahead." And J.D Power is forecasting that wholesale prices for used vehicles will drop 8 to 11 percent and bottom out in June.

What that translates to is great news for used-car buyers, and simultaneously, more than a few reasons to hold on to a used car for the time being, if you have one you want to sell. "For someone with a two-, three-, four-year-old vehicle that was also a heavily leased vehicle," Drury said, they'll be seeing "a larger impact on resale value." That's because there will be many other formerly leased vehicles on the market in the coming months.

Those who stand to be hurt by the fall in prices are sellers of used cars such as Ford Credit and General Motors Financial, which auction off their leased inventory, and rental-car companies, such as Hertz and Avis, which auction off their rental fleets. Every percentage point that used-vehicle values drop hurts their bottom line by millions of dollars.

So turbulence is heading into the used-car markets. In a note, Drury pointed out, "Recessions aren't kind to used values." That's bad news for sellers, but if buyers time it right, they can save on a future purchase.

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